Hill v. Vanderbilt Capital Advisors, LLC

• Decision Date: 30 September 2011
• Docket Number: No. CIV 10–0133 JB/KBM.,CIV 10–0133 JB/KBM.
• Citation: 280 Ed. Law Rep. 844,834 F.Supp.2d 1228
• Parties: Donna J. HILL and Yolanda Chacon–Valle, on Behalf of the New Mexico Educational Retirement Fund and its Members and Beneficiaries, or Alternatively On Behalf of Themselves and All Others Similarly Situated, Plaintiffs, v. VANDERBILT CAPITAL ADVISORS, LLC; Vanderbilt Financial, LLC; Vanderbilt Financial Trust; Pioneer Investment Management, U.S.A., Bruce Malott, Gary Bland, Veronica Garcia, Douglas M. Brown, Patrick Livney, Osbert M. Hood, Stephen C. Bernhardt, Kurt W. Florian, Jr., Anthony J. Koenig, Jr., Mark E. Bradley, Ron D. Kessinger, Robert P. Nault, James R. Stern, New England Pension Consultants LLC, Aldus Equity, Saul Meyer, John Doe # 1 John Doe # 2, and Does 3–100, inclusive, Defendants, and The New Mexico Educational Retirement Fund, Nominal Defendant.
• Court: U.S. District Court — District of New Mexico

834 F.Supp.2d 1228

280 Ed. Law Rep. 844

Donna J. HILL and Yolanda Chacon–Valle, on Behalf of the New Mexico Educational Retirement Fund and its Members and Beneficiaries, or Alternatively On Behalf of Themselves and All Others Similarly Situated, Plaintiffs,

v. VANDERBILT CAPITAL ADVISORS, LLC; Vanderbilt Financial, LLC; Vanderbilt Financial Trust; Pioneer Investment Management, U.S.A., Bruce Malott, Gary Bland, Veronica Garcia, Douglas M. Brown, Patrick Livney, Osbert M. Hood, Stephen C. Bernhardt, Kurt W. Florian, Jr., Anthony J. Koenig, Jr., Mark E. Bradley, Ron D. Kessinger, Robert P. Nault, James R. Stern, New England Pension Consultants LLC, Aldus Equity, Saul Meyer, John Doe # 1 John Doe # 2, and Does 3–100, inclusive, Defendants,andThe New Mexico Educational Retirement Fund, Nominal Defendant.

No. CIV 10–0133 JB/KBM.

United States District Court, D. New Mexico.

Sept. 30, 2011.

Gordon H. Rowe, III, The Rowe Law Firm, Albuquerque, NM, Richard D. Greenfield, Marguerite R. Goodman, Greenfield & Goodman, LLC, New York, NY, Jonathon Cueno, Michael G. Lenett, Matthew E. Miller, Brendan S. Thompson, Cueno, Gilbert & LaDuca, LLP, Washington, D.C., for Plaintiffs.

Andrew G. Schultz, Rodey, Dickason, Sloan, Akin & Robb, P.A., Albuquerque, NM, Peter L. Simmons, Fried, Frank, Harris, Shiver & Jacobson, LLP, New York, NY, for Defendants Vanderbilt Capital Advisors, LLC, Pioneer Investment Management U.S.A., Inc., Osbert M. Hood, Stephen C. Bernhardt, Kurt W. Florian, Jr., Anthony J. Koenig, Jr., Mark E. Bradley, Ron D. Kessinger, Robert P. Nault, and James R. Stern.

William C. Madison, Rebecca S. Kenny, Madison Harbour & Mroz, P.A., Albuquerque, NM, Peter A. Silverman, Joseph A. Donado, Figilulo & Silverman, P.C., Chicago, IL, for Defendant Patrick Livney.

Nicholas A. Foley, Douglas J. Buncher, John D. Gaither, Neligan Foley LLP, Dallas, TX, for Defendant Aldus Equity.

Michael Comeau, Grey W. Handy, Comeau, Maldegen, Templeman & Indall, LLP, Santa Fe, NM, Roberta Braceras, Jennifer Chunias, Goodwin Procter LLP, Boston, MA, for Defendant New England Pension Consultants, Inc.

Henry F. Narvaez, Martin R. Esquivel, Bryan C. Garcia, Denise Michelle Chanez, Narvaez Law Firm, P.A., Albuquerque, NM, for Defendant Bruce Malott.

Stephen S. Hamilton, Montgomery & Andrews, P.A., Santa Fe, NM, for Defendant Gary Bland.

Ellen S. Casey, Jaclyn M. McLean, Hinkle, Hensley, Shanor & Martin, LLP, Santa Fe, NM, for Defendant Veronica Garcia.

Richard J. Shane, Riley & Shane, P.A., Albuquerque, NM, for Defendant Douglas M. Brown.

Paul Shechtman, Stillman, Friedman & Schechtman, New York, NY, for Defendant Saul Meyer.

William Arland, III, The Arland Law Firm, Santa Fe, NM, Joseph Goldberg, Mary (Molly) Schmidt–Nowara, Freedman Boyd Hollander Goldberg Ives & Duncan, P.A., Albuquerque, NM, for Nominal Defendant The Educational Retirement Fund.

MEMORANDUM OPINION AND ORDER

JAMES O. BROWNING, District Judge.

THIS MATTER comes before the Court on: (i) the Vanderbilt Defendants' Motion to Dismiss Complaint, filed August 31, 2010 (Doc. 36); (ii) the Individual State Defendants' Motion to Dismiss Plaintiffs' Claims, filed August 31, 2010 (Doc. 41); and (iii) the Motion of the Educational Retirement Fund to Dismiss Plaintiffs' Claims Under Rule 12(b)(6), Federal Rules of Civil Procedure, filed September 7, 2010 (Doc. 48). The Court held a hearing on October 29, 2010. The primary issues are: (i) whether the Plaintiffs have standing to sue under Article III of the United States Constitution; (ii) whether a first-to-file provision in the New Mexico Fraud Against Taxpayers' Act, N.M.S.A.1978, §§ 44–9–1 to 14 (2007)(the “FATA”), precludes this lawsuit based on the state court action in Foy v. Vanderbilt Capital Advisors, LLC, No. D–101–CV–2008–1895 (1st Jud. Dist. Ct., N.M., filed July 14, 2008); (iii) whether the Plaintiffs may properly bring any of these causes of actions derivatively; (iv) if determined to be proper under statutory or common-law trust principles, whether the Plaintiffs are subject to a demand requirement before filing suit and, if so, whether the Plaintiffs satisfied the requirement or plead facts sufficient to excuse demand as futile; (v) whether any of the ERB Defendants ¹ are entitled to immunity on the Plaintiffs' claims for Breach of Fiduciary Duty (Count I), Fourteenth Amendment violation (Count II), Unjust Enrichment (Count XVII), or Constructive Trust (Count XVII); and (vi) whether the Plaintiffs have pled facts sufficient to state a claim upon which relief may be granted for Counts II–VI and XII–XVIII. Because the Court finds that the Plaintiffs' lack constitutional standing to assert their claims, the Court will grant the Individual State Defendants' Motion to Dismiss Plaintiffs' Claims for lack of subject-matter jurisdiction pursuant to rule 12(b)(1) and will remand the case to New Mexico state court. Because the Court does not have subject-matter jurisdiction and it is remanding to state court, the Court will not decide the merits of any of the Defendants' motions to dismiss pursuant to rule 12(b)(6).

FACTUAL BACKGROUND

The Plaintiffs are members ² of the Educational Retirement Fund (the “Fund”), a public pension plan that the New Mexico Education Retirement Act, N.M.S.A.1978, § 22–11–11 (the “ERA”), established for the benefit of employees in New Mexico's public schools, colleges, and universities. See Amended Complaint ¶ 1, at 1, filed June 30, 2010 (Doc. 30).

The New Mexico Constitution mandates that “all funds ... paid into or held by ... an educational retirement system ... shall be held ... [i]n a trust fund to be administered and invested ... [f]or the sole and exclusive benefit of the members, retirees and other beneficiaries of that system.” N.M. Const. Art. XX § 22(A). The ERB is “the trustee[ ] for [its] system [ ] and ha[s] the sole and exclusive fiduciary duty and responsibility for administration and investment of the trust fund held by ... [the] system[ ].” N.M. Const. Art. XX § 22(B). The Fund holds approximately $8.5 billion in assets and has approximately 95,000 current members and participants. See Am. Compl. ¶¶ 26, 109–10, at 8, 34. During the national economic crisis in 2007 and 2008, the Fund lost approximately $40 million on certain private equity investments. See Am. Compl. ¶ 4(b), at 2. The Plaintiffs allege injury from the Defendants' improper investment actions in the form of increased employee contributions, reduced services, tax increases, and increased risk that the Fund will have insufficient assets to satisfy its obligations in the future. See Am. Compl. ¶¶ 1, 10, at 1, 3.

In passing the Prudent Investor Act of 2005, N.M.S.A § 45–7–601, the New Mexico Legislature for the first time authorized the ERB to make “prudent” investments in alternative or non-traditional investments. Gaining access to funds newly available for alternative investments was allegedly competitive, and those marketing investments to the ERB hired third parties known as “placement agents” to facilitate access to investment decision-makers. Am. Compl. ¶ 7, at 3. At times, placement agents were retained primarily because of their political connections. The Plaintiffs contend that Defendant Marc Correra was hired to market the Vanderbilt Financial Trust (“VFT”) to the ERB, because he was well-connected politically in New Mexico and could “[sell] access to public money, including [ ] the Fund.” Am. Compl. ¶ 25, at 7.

In early 2006, the Vanderbilt Defendants ³ devised an alternative investment vehicle, the Vanderbilt Trust Offering (“VTO”), for the specific purpose of marketing the VFT investment to the ERB and the New Mexico State Investment Council (“SIC”). See Am Compl. ¶ 45, at 13. The VTO consisted of a private placement of the shares in the VFT, a statutory trust created specifically to own the membership interests in Vanderbilt Financial. See Am. Compl. ¶ 45, at 13. Vanderbilt Financial served as a holding company that would acquire alternative investments and its portfolio was ultimately comprised principally of heavily leveraged, equity tranche positions in certain collateralized debt obligations (“CDOs”).⁴See Am. Compl. ¶ 46, at 13. By design, a substantial portion of the underlying assets were allegedly subprime, Alt–A or A-minus mortgages,⁵ having been extended to borrowers who provided little to no verification of assets or proof of ability to repay, and who did not meet minimal lending standards. See Am. Compl. ¶ 46, at 13–14. Vanderbilt Financial's portfolio also included synthetic CDOs, which were not backed by any assets but instead amounted to wagers on whether other “reference CDOs” would succeed or fail.⁶See Am. Compl. ¶ 47, at 14.

In May 2006, the ERB elected to cause the Fund to invest in the VFT. The ERB Investment Committee, which recommends investments to the full ERB, met to consider the Vanderbilt Trust Offering at 11:25 a.m. on May 12, 2006. Defendant Patrick Livney, Chief Executive Officer and a director of the now defunct Vanderbilt Financial, LLC (“Vanderbilt Financial”), presented the Vanderbilt Financial Trust (“VFT”) investment to the Investment Committee and, according to the Investment Committee's minutes, Livney represented the VFT investment to be “a state of the art, top of the food chain investment vehicle.” Am. Compl. ¶ 56, at 16. The Plaintiffs contend that Livney made these statements knowing they were false and misleading, or in reckless disregard for their truth, to induce the ERB to authorize the VFT investment where Livney “knew that the portfolio of Vanderbilt Financial consisted of toxic waste, liar's loans, and exceptional loans, and [that the investment] was highly speculative, risky, and leveraged, and virtually worthless from the outset.” ⁷ Am. Compl. ¶ 56, at 16. When presenting to the ERB Investment Committee, Livney also allegedly “concealed the material fact that Correra would receive inflated and unjustifiable fees as placement agent in connection with the...